Nonprofit Capital: a Review of Problems and Strategies / Prepared by William P
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Nonprofit Capital A Review of Problems and Strategies prepared by William P.Ryan for The Rockefeller Foundation and Fannie Mae Foundation Nonprofit Capital A Review of Problems and Strategies Copyright © 2001 William P. Ryan Library of Congress Cataloging-in-Publication Data Ryan, William P. Nonprofit capital: a review of problems and strategies / prepared by William P. Ryan / for Fannie Mae Foundation [and] The Rockefeller Foundation. p. cm. 1. Nonprofit organizations — Capitalization. 2. Charities — Capitalization. I. Fannie Mae Foundation. II. Rockefeller Foundation. III. Title. 361.763 2 2001117609 ISBN 0-89184-055-9 Nonprofit Capital A Review of Problems and Strategies prepared by William P. Ryan for The Rockefeller Foundation and Fannie Mae Foundation Author’s Note/iv Nonprofit Capital: A Review of Problems and Strategies I am grateful to the many people who agreed to be interviewed for this paper; their examples, arguments and insights form the core of this work. Jane Preston, a consultant to nonprofits and a fellow at the Hauser Center for Nonprofit Organizations at Harvard University, provided invaluable research assistance. Mike Sviridoff contributed critically important leads, ideas and feedback throughout. Ed Skloot and Vince Stehle of the Surdna Foundation also helped in shaping the paper and offered useful leads and input. —William P.Ryan April 2001 Nonprofit Capital: A Review of Problems and Strategies Contents /v Contents EXECUTIVE SUMMARY 1 INTRODUCTION AND BACKGROUND 3 1. KEY THEMES 5 2. DEFINING NONPROFIT CAPITAL AND ITS BENEFITS 7 Facilities Capital 8 Working Capital 9 Permanent Capital 11 3. STRATEGIES AND SOLUTIONS FOR NONPROFIT CAPITAL PROBLEMS 13 1: Reforming the Nonprofit Capital Market 14 Reducing Transaction and Opportunity Costs Improving Foundation Leverage Encouraging More Philanthropy With Better Information for Donors 2: Reforming Philanthropy 16 High-Engagement Grantmaking Proprietary Intermediaries Stabilization Funds Philanthropic Tax Credits Program Related Investments 3: Reforming Nonprofits 20 Become Bankable Generate Working Capital Internally Become Self-Sufficient, or Create Social Enterprises Grow Nonprofits Convert to For-Profit Status 4: Expanding Access to Private Capital Markets 26 Institutional Strategies Technical Innovation Public Policy Strategies Social Investment Strategies 4. CONCLUDING REFLECTIONS 39 RELATED READINGS 41 INTERVIEWS 46 ENDNOTES 47 Nonprofit Capital: A Review of Problems and Strategies Executive Summary /1 HIS PAPER WASPREPARED TO HELP the Fannie Mae and Rockefeller Executive Foundations review the challenges and opportunities nonprofit organiza- Summary Ttions face in attempting to meet their need for financial capital, particularly in the areas of community and work-force development. Based on interviews and a literature review, the paper presents a summary of notable strategies and practices. Key Themes. Those interviewed for the scan are generally optimistic, in large part because nonprofits are more inclined and competent than ever to deal with finance and management issues, but they still find that working capital is the hardest to raise. Most feel that performance and capital are inseparable, and that simply sup- plying more capital — without attention to how it is invested — is not enough. Defining Nonprofit Capital and Its Benefits. Observers make two sets of distinc- tions in analyzing the capital problem and its solutions: ³ Three types of capital meet different needs and have generated different strategies: ➤ facilities capital funds the building or acquisition of offices and facilities; ➤ working capital covers expenses during low cash flow and funds strategic investments in an organization’s capacity; and ➤ permanent capital refers both to endowments and to the capital reserves that community development organizations use to invest in housing and business development. · The purported benefits of capital all center on improving productivity — especially compelling in today’s environment, where: ➤ expensive information technology is believed to be essential to enhanced efficiency; ➤ an emerging organizational effectiveness movement stresses investment of working capital in management processes; and ➤ capital can be a competitive asset that might not produce better program outcomes but could enable the organization to survive when faced with larger, better-capitalized competitors. Strategies and Solutions. The nonprofit capital solutions that were cited most often in the literature and interviews represent four strategies for dealing with capital challenges: ³ Reforming the Nonprofit Capital Market — Some analysts envision a more rational, segmented, and therefore more efficient and responsive, nonprofit capital market, which would create the time and incentives for nonprofit managers to improve their organizations. Executive Summary/2 Nonprofit Capital: A Review of Problems and Strategies Examples of this include: reducing transaction and opportunity costs; improv- ing foundation leverage; and encouraging more philanthropy with better informa- tion for donors. · Reforming Philanthropy — Some argue for making grants function more like working capital that nonprofits can use to improve their capacity and perform- ance, and less like revenues that fund direct service provision. Examples of this strategy include: high-engagement grantmaking (including the much discussed idea of venture philanthropy) in which funders add value and ensure accountability by becoming more involved in grantees’ work; proprietary intermediaries, which focus on building the capacity of a chosen few nonprofits, instead of an entire field; stabilization funds, which build capital reserves and finan- cial management capacity; philanthropic tax credits, which promote larger, longer term grants, and management assistance, from corporate donors; and program related investments, which are often credited with sharpening the focus on results. » Reforming Nonprofits — Others argue that nonprofits can generate their own working capital by: operating more efficiently; learning to use debt more aggres- sively; or by earning unrestricted income in the marketplace, although the latter may be built on widespread but dubious assumptions that public and philanthropic funds are shrinking. Examples of nonprofit reform strategies include: making nonprofits bankable; generating working capital internally, primarily through better pricing of services; creating self-sufficient nonprofits or social enterprises; growing nonprofits; and converting to for-profit status. ¿ Expanding Access to Private Capital — The big prize for a growing field of ana- lysts, innovators and policymakers is access to the private capital market, a prospect that has inspired a variety of innovations aimed at supplying permanent capital for community development projects. ➤ Institutional strategies to access private capital focus on creating the infrastructure for community investment by funding and strengthening a wide array of community development financial institutions (CDFIs). ➤ Technical innovations for accessing the private capital markets include the use of tax-exempt bonds (generally for facilities); net-lease finance (in which nonprofits convert real estate into capital by selling it and leasing it back); and secondary mar- kets to replenish the capital supplies of CDFIs. ➤ Public policy uses tax credits to encourage lending to and investment in CDFIs. ➤ Social investment strategies attempt to cultivate socially motivated investors, both individual and institutional, often willing to accept low returns as a trade-off for capitalizing social ventures. Nonprofit Capital: A Review of Problems and Strategies Introduction /3 his paper was commissioned by the Fannie Mae and Rockefeller Introduction Foundations to review current practices and thinking on how to meet and Tnonprofit organizations’ need for financial capital. Both foundations, joined by the Surdna Foundation, wanted a map of this vast, sometimes techni- Background cally complex landscape to aid in their own analysis and strategy development. The paper is based on interviews (with nonprofit managers, consultants, researchers and bankers) and a review of the literature, highlights of which are summarized under “Related Reading.” The interviews were open-ended discus- sions aimed at identifying both new and important practices and the underlying assumptions that shaped them. The interviewees cited dozens of practices and strategies in use across the nonprofit sector. But the paper gives special attention to those that grow out of or may be most relevant to two program areas of special interest to the foundations: community development and work-force development. The final result of this exercise is in fact much like a map. The paper attempts to provide an overview that might help decision makers better understand their options. So while it does not pretend to be a technical manual that readers can use, for example, to learn how to issue tax-exempt bonds, it does provide a context for considering the potential of tax-exempt bonds. It could help in thinking about some key questions: What kind of capital will a given approach generate? What can nonprofits accomplish with that capital? What are the alternatives? How else can we think about the problems of capital? The paper has four parts. Part one sketches a few cross-cutting key themes that emerged from the interviews and literature review. Part two defines nonprofit capital, and the problems that various